Question

Suppose the GDP growth rate is 8% and the rate of saving in the economy is 40%. The incremental capital output ratio (ICOR) is ............

Hint:

The ICOR is a measure of the efficiency with which capital is used to generate output growth. It is the ratio of investment to GDP growth.

Answer 1

The formula for the Incremental Capital Output Ratio (ICOR) is: \[ ICOR = \frac{\text{Investment Rate}}{\text{GDP Growth Rate}} = \frac{s}{g} \] Where:
- \(s\) is the savings rate (0.40 or 40%),
- \(g\) is the GDP growth rate (0.08 or 8%).
Substitute the given values into the formula: \[ ICOR = \frac{0.40}{0.08} = 5 \] Thus, the incremental capital output ratio (ICOR) is 5. Final Answer: \[ \boxed{5} \]